Greece's election result has eased fears of imminent financial disaster for Europe, but the continent's leaders are still searching for a way to contain a debt crisis that threatens the global economy.
A narrow victory for the New Democracy party in Greece means that the country is more likely to stick to the harsh austerity terms of its 240 billion euro ($300 billion US) bailout and not face a chaotic exit from the euro in the very near future — an event many fear would destabilize Europe and send shockwaves through the world.
The country's economy is still in a very vulnerable state, however. It is in a fifth straight year of recession and could easily deteriorate to the point where a default and euro exit were inevitable.
Europe is struggling to put out several fires, not just the one in Greece. Heavily indebted Spain and Italy saw their borrowing costs rise Monday, increasing pressure on their government finances and keeping alive fears that another big bailout might be needed. That would considerably strain the eurozone's ability to protect its members and keep the currency union together.
"The crisis is far from over," Commerzbank analyst Christoph Weil said in a note to investors. "A sovereign default by Greece and the country's exit from the monetary union have probably been avoided for the time being. "
The eurozone's challenges run deep. The economy is expected to shrink this year, with the so-called peripheral countries like Greece and Spain in painful recession. Many of its banks remain on life support, propped up by emergency credit from the European Central Bank.
Europe is a substantial trading partner with the rest of the world. If it falls into a deep recession sparked by a default in Greece or a massive bailout for Spain, orders for goods made in the U.S. and China are going to start falling off.
European leaders to meet
No clear route out of the crisis has been laid out, and expectations are uncertain whether a June 28-29 summit of European leaders in Brussels will prove any more convincing than previous ones that failed to restore confidence.
"The crisis in Greece and the eurozone remains intense," Fitch Ratings said. "While the risks from Greece have fallen for now, the severity of the systemic crisis engulfing the eurozone is unlikely to diminish until European leaders articulate a credible road-map that would complete monetary union with much greater fiscal and financial integration.
"Fiscal austerity and painful structural reform combined with a strong parliamentary opposition led by Sryzia means that the new Greek government is likely to be fragile," Fitch said.
Financial markets have worried for weeks that Sryzia, a radical leftist party, would prevail and reject Europe's unpopular bailout plan.
Instead, conservative leader Antonis Samaras of the New Democracy party received a mandate to launch coalition talks.
The speculation is that Samaras will try to form a governing alliance with the rival PASOK party by the end of this week.
Those negotiations appeared set to enter a second day amid political wrangling, after the head of the socialist PASOK party, Evangelos Venizelos, insisted on a broad coalition and said negotiations must wrap up by the end of Tuesday.
"The most crucial thing for us right now is to achieve the greatest possible range of consensus, and this must happen by tomorrow night at the latest," Venizelos said after meeting with Samaras.
Both support keeping Greece's bailout deal with its European government creditors, although they want to renegotiate some of the harsh austerity terms taken in return for the international rescue loans.
The previous government said the government would run out of money July 20 if more funds are not received.
Greece's economy is teetering on the abyss, with businesses struggling to pay suppliers and depositors steadily pulling money out of already troubled banks.
The shrinking economy lowers tax receipts and makes the debt burden larger by comparison.
Countering the hope that Greece's election result had eased fears of an imminent financial disaster for Europe were soaring borrowing rates in Spain.
Those spiked Monday above levels that forced other countries to take bailouts, a sign that bond investors fear Spain will default on its debts.
Germany paid most into rescue fund
Germany, the country paying the most into the Greek rescue funds, on Sunday held out the prospect of easing some of the strain on Greece, in terms of the deadline for meeting targets for cutting government spending.
Germany's Foreign Minister Guido Westerwelle said that Greece had to implement all agreed reforms but that "I can well imagine talking again about timelines."
Martin Schwerdtfeger, senior economist with TD Economics, held little hope that Greece would remain in the currency union, given the difficulties having New Democracy and PASOK work together.
"Beyond the very short term, having a coalition government formed by two historically antagonistic parties presents risks," Schwerdtfeger said in a commentary.
"We believe Greece will have to restructure its debt once again and that the country will eventually leave the euro zone.
"Until Germany is willing to foot the bill for much of the eurozone restructuring and acknowledge that monetary union implies further integration towards a fiscal, political and banking union, the crisis will continue," Sherry Cooper, the chief economist at BMO Financial Group said.
"Germany has become an export powerhouse and 40 per cent of its exports go to the eurozone," Cooper added.
"Germany cannot afford to let the eurozone slide into further crisis."
One beneficiary of Sunday's result in Greece may be U.S. President Barack Obama, who has urged European leaders to take more vigorous action to avoid a threat to the U.S. and global economies. The election win for New Democracy increases the likelihood that any disruptive Greek exit from the eurozone would not happen until after Obama's contest with Republican challenger Mitt Romney in the November U.S. presidential election, rather than before.